Marc Levinson, the author of An Extraordinary Time, is an economist, historian, and journalist who writes for publications including TheWall Street Journal, Bloomberg, Foreign Affairs, and The Economist. The reviewer, Paul Kennedy, is a professor of history and director of International Securities Studies at Yale. They represent views of many learned persons from the “economic intellectual” types. That general view is that our country has entered a new, low growth era, and nothing can be done about it. I vigorously disagree.
I began my career in the early ‘70s, and I lived through the turbulent times that ended with inflation at 14% in 1980, the dollar at a generational low, and there was high unemployment; yet many learned people (such as Levinson) never seem to stumble upon the question of what would have happened if the country had operated under a gold standard that Richard Nixon ended in 1971?
I prove my argument by showing you the long history of the price of gold to the amount of dollars it takes to buy a constant quantity of gold. Today the market price of gold is about $1,200 per ounce. First look at Chart 1, shown at the end of this chapter (reproduced from the website of PricedInGold.com). This chart is in dollars to a milligram of gold, but the ratio would be identical if expressed in ounces instead of milligrams. The dollar was constant from the beginning of the country, except for a small dip during the Civil War, up until FDR altered the amount of dollars it took to buy one ounce of gold. The price was then stable until President Nixon, spooked by a mild recession, took the country off the gold standard in 1971. The price of one ounce of gold, in dollars, moves inversely to the charts shown.
Britain had two centuries of prosperity operating under a gold standard devised by the Head of the British mint, Sir Isaac Newton. He tied the pound to the ratio of 3.89 pounds to an ounce of gold in 1717. Alexander Hamilton took this concept to the Washington administration. He originally fixed the dollar, by law, to the specific weight of gold; $19.39 per ounce, later adjusted to $20.67. The dollar price of gold in ounces was $20.67 up to 1933, and $35.50 after FDR arbitrarily changed the price. The gold price stayed close to the $35 up to 1970, when the price rose a little to $38.90. After Nixon took us off the gold standard, the price rose to $44.60 at the close of 1971, then rose steadily each year to $850 in 1980. The price dropped somewhat until the year 2000, then rose again. It has been higher in recent years, but now stays about $1,200 per ounce.
To me, the concept of a gold standard is not hard to understand, but where it does get confusing is: (1) whether we are talking about dollars being convertible to gold, or gold being convertible to dollars, and (2) in whether we are talking about the price of gold in dollars, or what one dollar is equal to in a weight of gold in ounces, milligrams, or whatever unit chosen.
The first issue is then convertibility. Up to 1933, people could carry either dollars or gold coins in their pockets, and paper bills were exchangeable for gold and silver coins at any bank. Prices had been stable for over a hundred years except for periods of war and other calamities. In 1933, U.S. citizens’ gold was confiscated, the dollar was devaluated by 41%, and we entered a period where the treasury tried to hold the value of the dollar at 1/35th of an ounce of gold. This was largely successful until the late 1960s, when so much gold was required to buy up all the dollars foreign countries were selling that the U.S. government simply gave up, and “closed the gold window” in 1971. The U.S. pot of gold had shrunk from 22,000 tons to 8,000 tons. The value of the dollar then collapsed over the next 10 years, hitting bottom in 1980. Advocates of going back to a gold standard do not believe that dollars must be convertible to gold, but rather by other financial practices the price of gold can be held constant. I am not qualified to offer a confident answer of yes, it would work, but why not let financial experts debate this subject, and consider giving it a try? If it worked as some modern-day advocates such as Steve Forbes of Forbes magazine and two-time presidential candidate, and Steve Moore, economist and advisor to presidents claim, a whole lot of U.S. problems could be solved.
The second issue is how to state the units, and which way one is pricing dollars and weights of gold. This gets confusing. Today it takes about $1,200 to buy one ounce of gold. One dollar is, therefore, equal to 1/1200 ounces of gold, which is 0.0008333 ounces. Alexander Hamilton fixed the dollar to the specific weight of gold, which was $19.39 per ounce of gold. This moved slightly to $20.67 up to 1933. FDR changed that to $35.50, which was a 41% devaluation of the dollar. Then there are 28,349.523 milligrams in one ounce. Peruse charts I shown at the end of this chapter, but just focus on the fact it took $19+ to buy an ounce of gold at our country’s beginning, and it now takes$1200, and this number changes and is always subject to change. It makes comparisons of cost over time all but impossible. For example, the steel entrepreneur, Andrew Carnegie, sold his holdings in 1901, which became U.S. Steel for $225,639 million, which in 2016 dollars is $6.43 billion. I have to say the inflation and the devaluation of the dollar makes financial history nearly impossible to understand; no wonder my grandkids can’t believe that my 1965 Mustang convertible cost $2,600.
Now, considering that gold can never be destroyed, and that all gold ever discovered since the beginning of civilization for all practical purposes is essentially constant (new gold added each year is now about 2% growth), it makes the most sense to consider a specific weight of gold to be of constant value. Consider then that it is the government issued money that changes. Tethering the currency to a constant, such as gold, thus stabilizes the currency to a non-changing commodity. Then, the unit by which we price all the goods and services we produce and all that we buy, which is the most important unit we use in living our life, would be as certain as the number of inches in a foot, or the number of minutes in an hour.
I refer you to Steve Forbes’s book, Reviving America, should you wish to delve deeper into the intricacies of a gold standard, but here is some more on what it would take to get one, and how it would work. I paraphrase from his book. First, there are several types of gold standard. The classical gold standard is what Newton devised, and what most of the world’s largest economies used up until WWI. A gold exchange standard was used after WWII. A gold price system is a 100% gold-backed currency. Under the classical standard used in the latter 1800s, people used paper notes as they do today. The countries pegged their currency to a specific weight of gold. You could take your paper notes to the bank and exchange them for gold at a fixed rate, or you could swap gold for cash. Governments possessed gold reserves in the form of gold bars. In the United States in 1901, gold bullion in its reserve was 42% of bank notes in circulation. The result was stable money. Convertibility was sacrosanct. If people feared the government was printing too much money, governments would quiet fears of by taking steps to demonstrate fiscal prudence such as raise interest rates to attract money, or cut spending; anything to reassure markets that there would be no deficit inviting needless printing of money—and ensure inflation. Misunderstandings today are about the need for the country to own enough gold to function under a gold standard, but that isn’t necessary. Another misunderstanding arises over the balance of trade and balancing imports and exports, but a “trade deficit” gets balanced by investment dollars that return to the economy. It was WWI that brought an end to the classical gold standard. The need to pay for war always trumps the commitment to sound money. The pressures of a major war have always led to inflation. What should have been done after WWI was to return to a gold standard at ratios based on post-war values. After WWII, many nations pegged their currency to one or two “reserve currencies” already linked to gold, like the pound or dollar. The target or reserve currencies directly linked to gold used typical monetary tools, such as open market operations or intervening (buying or selling a nation’s currency) in foreign exchange markets. These systems collapsed because the guardians of the system were unwilling to abide by its discipline. Britain in 1931 mistakenly devalued the pound to fight the Great Depression, and the U.S. in 1971 to combat a mild reces
sion. Congressman Ted Poe of Texas introduced legislation to enact a modern version of the gold standard; a “gold price system.” The dollar would be pegged to gold at a certain price, like $1,100 an ounce. If the price of gold rose above that level, the Federal Reserve would move to bring it back to $1,100 by reducing the money supply. If the opposite occurred, the price dipping below $1,100, the Fed would expand the supply by either increasing bank reserves or encouraging banks to make more loans. The Fed would no longer be allowed to set interest rates, except for interest it charged on loans to banks during an emergency. Forbes suggests setting the gold price based on a 5 or 10-year average of the gold/dollar price, marked up 10% as insurance against deflation. This would have to be instituted through an Act of Congress.
At this point, I think it useful to discuss inflation (and corresponding devaluation of the dollar). Milton Friedman has argued that inflation is just too many dollars chasing too few goods and services. In Friedman’s later years, he modified his view a little, but most feel his assertion is correct. The dilemma posed to the government, however, is how to determine the right amount of money in the system. That’s because the population steadily increases, but since the exact number is an impossible thing to divine, why not just let “Mr. Market” tell us by simply checking the market price of gold. The government, in recent years, basically tries to calculate what the inflation rate is, and from here, trying to predict where inflation is heading in the near future, and then make adjustments to shoot for some arbitrary number, such as 2% inflation per year. I say, why do we need any inflation, and second, how the heck do you measure something when through natural progress of our culture, no goods or services remain the same? There is no way to get to an apples-to-apples comparison. A 2016 automobile is very advanced compared to a 2000 model year, and the future self-driving car will be even more advanced. There is no way to determine the inflation rate by the change of car prices over the years. Yet, this is what the government tries to do.
Because of the need to tighten when the price of gold rises, means Congress, should they spend money like “drunken sailors,” the Fed, in turn, would raise the interest rates, up to when the electorate can’t stand it anymore. At that point, Congress would be forced to cut spending down. No need for a Constitutional Amendment to require a “balanced budget” where the country could get into a jam at times of national crisis. Instead, with a gold standard, deficit spending would just have to stop.
Now, since basically no one noticed when Nixon took us off the gold standard (me included), I see no reason to try and argue the case for returning to a gold standard by trying to educate the electorate on this matter. Rather, we just need to educate a presidential candidate and influence his pick for Secretary of Treasury. Ideally, it would be a Secretary who understands this subject. Then we need to elect members of Congress that believe in the sanity of a gold standard, and act on it. And that’s the end of my sermon.
What are the upsides of returning the dollar’s link to gold? (1) No more inflation, which benefits savers, i.e., the value of money put into savings is “protected” from eroding away through inflation. (2) Businesses that plan to expand, would now be able to reliably predict future expenses, thus stimulation of business expansion. (3) Government deficit spending could no longer be sustained, so the accumulation of huge debts would stop. (4) International trade would increase because every country would have to stop the “cheating” that gives their country an unfair advantage. With the U.S. being the dominant player in the world’s economy, what the U.S. does would eventually encourage all countries to either peg their currency to the dollar, or establish their own country’s gold standard. (5) Oil is quoted in international markets in dollars. Oil price would have to stabilize to a near constant price, affected only by supply and demand. Don’t believe me? Just examine the third chart that follows. The spike in oil price from $20 per barrel to near $120 by 1979 or so, corresponding to the time Nixon took us off the gold standard, makes my case. A stable dollar wouldn’t have panicked the Saudis to attempt to protect their wealth and future oil’s revenue stream by raising oil’s price. The bottom line would be, per Steve Forbes, that the country would experience profound prosperity, and business would flourish from new investment where the investors could be assured that money lent would be returned with an investment gain.
Who could be against returning to the gold standard? (1) Politicians that buy votes by giving away taxpayers’ wealth to special groups. (2) Socialists with the belief that all problems need to be solved by government, thus wanting an ever-expanding federal government; and any debt be damned.
In closing, you most likely would be upset if the unit of measurement was changed by the president to change the foot ruler to 13 inches to get the public convinced he just made housing more affordable (price per square foot), when all he did was make a smaller house priced at a smaller price. Then, if he went to changing the unit of weight from one pound to 17 ounces for the same reason. And then, to give everyone more time, he changed the unit of time to 70 minutes in an hour. So, why shouldn’t you be upset when the unit of account, the dollar, perhaps the most important unit of all, has no constant value until it is tethered to a constant such as the nearly unchanged commodity of gold? I encourage you to tell this to politicians when they want donations to pay for their election expenses, and tell this to the political parties when they ask for your money. Maybe someday, your voices will be heard.
PRICE OF OIL IN DOLLARS
What I find interesting in the Crude Oil Priceschart is what happened to oil prices after the U.S. was off the gold standard in 1971. Try looking at the world through the eyes of the heads of the Saudi Arabian oil interests. In 1970, it took $20 to buy one barrel of oil. Today, it’s $50. Is oil getting more expensive? Probably not in terms of the dollar’s devaluation since 1971 (see Price Inflation chart). This shows that a dollar’s valuation in 1971, compared to when the country was founded. It was worth 35 cents by 1971. Today, it’s worth 5 cents. So today, it would take 7 dollars to equal the same value it had in 1971. When all is compared to gold, maybe oil’s price relative to gold hasn’t changed much. I know, these ratios aren’t precise, it is a big world with many things going on, but maybe the oil shocks we faced in the years following Nixon’s abandoning the gold standard simply was caused by the Saudis reacting to the dollar devaluation.
Abandoning the gold standard in 1971 had terrible consequences: high inflation, the oil shocks, and disappearance of much wealth. Nixon did it because there was an old-fashioned bank run on the nation’s gold supply. The flaw then was the convertibility of dollars to gold and gold back to dollars. What is being proposed today is carrying out policies that would affect the money supply, with increases and decreases based on the market price of gold. This kind of regime would not be absolute, but would have the attributes of the previous absolute gold standard and over time should end most inflation, preserve citizen’s wealth, and significantly end unfavorable terms of trade with foreign nations.
PART THREE – ECONOMIC ISSUES AND POLICIES
13 - FEDERAL DEBT
It’s Time to Start Retiring the National Debt: Most Americans know that our country has a huge growing debt problem. Most think that’s a bad thing, but it never seems like an immediate threat. Imminent threats, such as terrorist strikes, do catch everyone’s attention, and do call for action by our politicians and policy makers, but national debt doesn’t. Maybe it’s been like the boy who called wolf—it gets talked about a lot, but it never seems to result in crisis. If there were massive job layoffs, there would be a national cry for resolution. All the while, on a personal level, we all know (or should know) how insidious the pain from the accumulation of debt can be. That is,while not felt at first, with the accumulation of more debt, at some point it will get painful and unbearable. The end-point being bankruptcy (think shame and disgrace).
The national schizophrenia of personally fearing debt, while oblivious to it for the nation, will a
t some point become a crisis. For example, at our present $20 trillion or so of debt financed at a ridiculously low rate of interest of about 2.5% requires a payment schedule of $223 billion (2015) or 6% of the national budget. Should interest rates return to their long-term averages, annual payments would double or triple.
This chart gives the perspective of how high the debt today is compared to the past; it’s never been so high as a percent of the economy. The current debt is a lot higher than the stated amount because it does not include the unfunded liabilities of Social Security and Medicare. If those future liabilities are included, the number probably goes above $100 trillion. In other words, where it is now, and where it is headed, cannot be sustained. Something will have to give; worst-case scenario is a collapse of the United States government. So, why tempt fate? Wake up, America, and start turning this thing around.
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